Don't let it get away!

Warren Buffett didn't buy Facebook (Nasdaq: FB) , and I have a feeling that if I told him I liked the stock, he might punch me in the gut. Actually, that seems to be the most common reaction to my mentioning the possibility that Facebook is a good company. But Warren would be wrong to punch me in the gut, even though everyone would applaud him for doing it.

Facebook is going to make money for shareholders.

Why would any sane person ever buy Facebook?One hundred times earnings! A hundred! Google (Nasdaq: GOOG) , the greatest tech company known to man, only trades at 18 times earnings! What sort of idiot would be tempted to buy a company that overvalued? A company Warren Buffett has no interest in? A company run by some short dude in a sweatshirt?

I am happy to be that tempted idiot.

Let's dispel a myth or two. A hundred times earnings is a lot, but I've seen a higher IPO -- for the mighty Google itself. Big G IPO'd at 217 times earnings on its opening day of trading, and it had the gall to pop to more than 250 times earnings. So maybe 100 isn't "crazy."

Second, let's talk about revenue. Right now, Facebook makes its revenue through the sale of ads. In 2011, the company made $3.1 billion, or 85% of its total revenue, through advertising. Clearly, this is Facebook's current moneymaker, but let's look closer at the missing 15%.

That remaining $557 million in revenue came from Facebook's payment platform, which the company made mandatory for payment acceptance last year. Right now, it's mainly being fed by Zynga (Nasdaq: ZNGA) , but in the future, any payment made on Facebook will be processed through the homegrown platform. Let's take this knowledge and do a quick "what if" scenario.

What if the investing world is right and Zynga's competitive moat is about 4 inches wide and half that deep? Every Zynga-style company that Facebook partners with (Activision Blizzard, Microsoft, Electronic Arts -- you know, start-ups) can pull in upwards of $400 million -- Zynga alone contributed $445 million in 2011. There is an excellent opportunity for Facebook to turn its 900 million users into an army of app purchasers. From my perspective, the Facebook Payments platform is the true growth driver for the company.

And the restWe haven't even touched on Facebook's brand strength and customer loyalty. Millward Brown's most recent brand ranking report places Facebook as the 19th most valuable brand in the world, just behind Amazon.com. The research firm estimates Facebook's brand to be worth $33 billion, a 74% increase on last year's valuation.

And now everyone is thinking, "This may all be true, but isn't it just like MySpace?" On the contrary, MySpace last boasted about its user numbers back in 2006, when they finally hit 100 million. That's no longer impressive. Heck, Twitter already has almost 600 million users. By the way, Facebook has tapped that frothy keg, too. Its seemingly crazy Instagram purchase has put it in every Twitter user's timeline. Instagram has more than 50 million users and is adding around 5 million a week.

Why are you not buying Facebook right now?Facebook has a massive base of users, who spend an average of 400 minutes a month on the site. It has an untapped payment platform that generates income off the back of other companies' hard work. Its revenue grew 88% last year and 154% in 2010. If it were a country, it would be the third largest in the world by population.

No, my vote at the shareholders' meeting isn't going to stand in the way of Mark Zuckerberg doing what he pleases. No, there isn't any meaningful system of checks and balances on Zuckerberg. And yes, one of the founders has seemingly stepped into the Twilight Zone to save a few million in taxes. But here's the thing -- I just don't care.

Facebook is going to do really well. The stock might flounder around for a while, but in two years, you'll be rolling in returns. It should be noted that I don't even really like Facebook, but look at the thing. This is an excellent company that has changed, is changing, and will continue to change the way we look at the Internet and social interaction. It's a once-in-a-long-time stock, and I want in.

If you like the idea of being in on the ground floor of world-changing companies, and you want to make some money from being so enlightened, then you are an excellent person. You are also the sort of person who should read the Fool's free report on 3 American Companies Set to Dominate the World. These companies have been there and done that, and they're now ready for even more "being" and "doing." Get your free copy now.

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At a Price-Earnings Ratio of 47, Facebook is at least two-and-a-half times as expensive as established technology giants like Apple, Google, Microsoft and IBM , not to mention broad indices like the Nasdaq-100.

Sorry about the jargon. Facebook has a system for making payments within itself. For instance: I have a farm in Farmville and I want to buy a duck (as a side-note, I don't play any of these games so the actual pieces might differ but the mechanic is the same). The duck costs $1 and I'm buying it from Zynga, the maker of Farmville.

When I actually make the purchase, it's processed through Facebook's technology and Facebook takes 30% of the total purchase as a fee from Zynga. So every duck brings Facebook $0.30.

Interesting thoughts. Just the "brand value" alone is often underestimated in my opinion. Not sure I would buy FB in the $30s though, but when it drops into the $20 range I will definitely be interested. I think that will happen within a year.

But what if ...all of your thesis doesn't come true, what are the risks? I would like to know your suggesstion of entry level, the risk/reward ratio for the long trade and time-line, as well as stop loss. Thank you.

Great article. Everything I've been saying from the start. Check out a similar article that absolutely proves that Facebook is going to be a great bet. Search the title "Why Facebook Stock will Upset the Naysayers"

your comparison with big G's IPO p/e is not complete/valid: do you know what were Google's valuation and growth rate at it's IPO? Was it 100 billion dollar company when it IPO'ed with higher pe? Did its growth slowed at its ipo? Please do a real comparison.

There is always and has been doubters who don`t want to accept changes. However, sometimes changes are good for our economy and human development. Before Google there was Yahoo. Now I think it will probably be Facebook.

If you gave me $100 billion I could make you a super website that translates, interacts with the user, finds you activities that you like, has no "down time" and glitches, and really gives you an experience... Google is kind of like that. Facebook is nothing more than loading pictures onto a website and the user doing all the work. There is no experience.

You are correct about not having a vote since Mark has the majority vote. This might not mean much to you but so many people have been upset with him and his direction, from stealing the idea, to kicking out the money backer, to selling personal information of users, and putting a stupid timeline that no one likes onto the site. If he has no friends after burning people up with this terrible IPO, and always making people angry time and time again, then is this the person you think will make great ideas become profitable? I think not.

Like I said, give me $100 billion and I will build you something a billion times more powerful then Facebook.

This is some decent analysis. I've been pondering fb but am not buying any in the near term. I decided to short it in caps and it's been a great decision so far. But I still wonder if investors are overlooking the possibilities of it. I definately wouldn't be interested in taking a big stake in it if I did decide to buy but I might buy a small stake as a speculative investment.

Here's an idea that might work. When it gets into the $17's and $18's per share (a more reasonable P/E valuation) buy it heavily, and ride the investment UP to the point of the low $40's, then sell it off to those who purchased at the IPO price, who will be even more wishful thinkers, to ride it up further. Kinda' like a tag team, only you will have bought low, and sold high, while they bought high, and want to sell higher...

I am admittedly a bit old school in my investing approach and I am a fan of Buffett...but...900 million users is a huge channel to move any new profit center through in the future. I did not buy Facebook for the company's current business model although I think it's fine. I bought it for the momentum 900 million users can bring forth in the future. "If it were a country, it would be the third largest in the world by population." I don't mind losing on this one if it doesn't pan out. The risk/reward ratio looks pretty interesting to me.

- 100X earnings... already pointed out that Google managed to be where it is today while hitting 2X that level.

- Zynga... EdMeat said it's not additive... shows what you know! Of course it's additive. Just because you 100 people playing Zynga games today does mean those same 100 people will be split among everyone else. You probably gave a similar answer re: Atari vs. Nintendo in the early 80s...

- "Give me $100bn and I can make a website too" ... yeah great, Google did that with Google+, GOOGLE fercrissakes the people who everyone is plugged into, and they haven't been able to make it work... Who uses G+?? Crickets chirping... FB is a brand and THAT MATTERS. Comparisons to My Space are apples to oranges, yup, they're both fruit but that's where's similarities end. We're also forgetting just how obsessed the average person is with playing with their smartphone today--everywhere you go people are on those smartphones constantly. It's the new TV. My Space was fine, but they didn't grow or monetize like FB has, they also did not have the benefit of being popular at time when mobile access to their site was so prevalent. It's like declaring soap operas DOA just because the first ones came out before TV's were in every home.

Is FB going to be a big winner? Well, it already is. Am I going to risk a large chunk of my portfolio on them? No way Jose. How about 1.5%? Now we're getting somewhere. The mid-20s look attractive to me in all respects.

Facebook is currently worth about 13.50 a share, however if they were to offer an upgraded membership, maybe 2 bucks a month to not harvest your information or republish your photo's, I would be all in, and you had a choice. Either use it like you do now, or have a secure page for a few bucks, maybe teachers or professionals who don't want their info leaked, for a small fee you would be protected and insured. I really like FB, however I would like my security settings always updated to the fullest by FB. Wikifamilies has the right idea, however FB is where people like to communicate at.

I doubt Facebook will disappear, but I also doubt it is worth the current stock price.

You mentioned "brand strength" and "customer loyalty". I'm on facebook only because many of my relatives are on it. And pretty much all of my relatives are on it less than they were a year ago. Many of them are commenting that "it's nice, but I don't want to waste so much time on it".

And as Facebook gets more determined to throw ads in people's faces, the people are less happy with it. I do not agree that Facebook has tremendous customer loyalty that it can bank on. For *some* customers it does, but not for all the customers that it brags about having.

"Its seemingly crazy Instagram purchase has put it in every Twitter user's timeline. Instagram has more than 50 million users and is adding around 5 million a week"

Why did Facebook have to buy instagram? It already had support for photos and albums, but it was some other company who was bringing racking up those customers. So Facebook paid something like twice as much for Instagram than the company had been valued just a short time earlier. In my opinion, Facebook was eager to pay that much because Instagram was being quite successful without any connection to Facebook.